00:00No better person to kick off our coverage this morning at the BUN Summit here on the banks of the Huangpu River in Shanghai and the financial district across the river is Stephen Roach.
00:10He's a Yale Law School senior fellow. Also, of course, the former chairman of Morgan Stanley Asia.
00:16Thanks so much for having you, Steve. Always glad to be here.
00:20I mean, I'm sure you have lots at the forefront of your mind right now, but let's talk about the upcoming possible Xi Trump meeting on the sidelines of APEC.
00:29How high are your hopes for that to kind of stabilize the relationship?
00:35Because, again, Donald Trump is threatening tariffs upwards of 155 percent because they can't seem to find ground while they're trying to find leverage.
00:43They can't seem to find ground on certain export controls.
00:47Well, you know, leader leader summits are always important in terms of the cosmetics, the press and media coverage, but they rarely accomplish a little.
00:59I've studied them back to the first summits with Mao and Nixon.
01:06We've had 22 major leader leader summits between the U.S. and China since then.
01:12I'd say two or three of them have been major world moving events.
01:17The rest have been blah, including the last one between Biden and Xi Jinping in San Francisco.
01:25So I don't expect much, but I think it's good that the two leaders will meet.
01:31What do you think could move the needle, though?
01:34Obviously, both sides are building leverage for which they could possibly make concessions.
01:38Whether it's soybean purchases from the United States might be too late already.
01:43The crop is the harvest is deep into the season, but also, of course, rare earths and then semiconductors on the other side.
01:52Well, I think, you know, what we'll most likely see, you know, is another taco move on the trade threat from President Trump.
02:01He's done it once before. There's no reason to think he won't do it again.
02:06And he's already alluded to the fact that, you know, he's probably going to fall back from his threat of an additional 100 percent on top of the pre-existing 30 to 50.
02:17He can't really make up his mind on what that is.
02:21But, you know, China's got some powerful strategic options that it has deployed recently.
02:29Most importantly, I think the rare earths export controls that they've imposed,
02:36which is really causing potential pressures on global supply chains and on U.S. manufacturing.
02:43Did the U.S. underestimate the bargaining chips that China actually does have coming into this second major trade war between Trump and Xi, if you will?
02:52You can call it that.
02:53Well, I think the U.S. has always underestimated China's bargaining chips.
02:58We view in the United States as a relationship that's a one-way dependency, that China depends on us and we don't depend on China.
03:09I've written two books. I'm actually starting a third on codependency, where we both depend equally on each other.
03:16And I think China is demonstrating the two-way nature of this important economic and security relationship.
03:26Six months into, you know, since Liberation Day and the launch of all these tariffs,
03:31what does your research tell you that the net impact has been on the U.S. economy?
03:37We're baking in already a couple of Fed cuts.
03:42Where's the inflation specter going to be as we keep on going down this road?
03:48Well, I look back and, you know, what I wrote on Liberation Day,
03:51and the actual impacts have been slower and more gradual to occur than I and most others thought.
04:01But there are clear signs of goods inflation, especially in certain categories like furniture
04:11and some consumer appliances where price increases are being picking up due to tariffs.
04:18And I think what I would take away from this experience post-Liberation Day
04:24is the impact is slower, albeit it's still in the direction that most of us had expected.
04:32You care to weigh in at all what your op-ed highlighted,
04:36and that is the damage that potentially is happening to the U.S.
04:39because of the executive order process,
04:42as the tariffs have been executive orders and not through the two chambers of Congress.
04:48And what that is necessarily doing to undermine American legitimacy.
04:52Well, I think what you're referring to is I wrote an article several months ago
04:56called America's Cultural Revolution that was pretty controversial
05:01and got a lot of pushback from my former friends in the United States.
05:06They said, how dare you compare this to the most wrenching social and political upheaval the world has seen.
05:12My point is revolutions are relative compared to pre-existing norms in any system.
05:19And compared to the norms that we've had in the United States prior to Trump 1 and especially Trump 2.0,
05:27this is a dramatic shift from the standpoint of executive overreach,
05:33from the standpoint of trade policy,
05:35from the standpoint of our alliances with the rest of the world.
05:38And that's an important point that I would, you know, like to stress here.
05:43Unlike China's Cultural Revolution, which had no impact on the broader world
05:47because China was a tiny, isolated economy,
05:50America's upheaval will have a major global impact because of our role in the world.
05:56Do you find that China, though, has weathered this turmoil fairly well or better than in the past
06:01because they've found their bargaining chips, whether it's rare earths and magnets,
06:06and they've built up their own domestic AI industry and they're developing their own AI chips.
06:11They're buying soybeans from Argentina and Brazil, not the United States.
06:15They've built in those buffers, but they have troubles.
06:18They have three consecutive years of deflation.
06:21There's a race to the bottom.
06:22Some call it, Huang Yiping, who we'll talk to later, says it's a rat race to the bottom.
06:27So they have some structural issues.
06:30How do you see the need for the priorities shift in this next five-year plan,
06:35which the top Beijing leaders are concocting right now to boost consumption,
06:39to, you know, bring the imbalances back a little bit more?
06:43I've been focusing on for longer than I care to remember,
06:46and it's more urgent now because of many of the structural problems you just alluded to, Steve.
06:51The property sector, for example, is dead money for the foreseeable future.
06:57Exports are booming, but, you know, the world is pushing back, even, you know, outside of the U.S.
07:06I think there's a protectionist backlash, and you wonder how much China can continue to diversify away.
07:13The investment sector, which has been booming, is now, you know, 40 percent of GDP.
07:18How much higher can it go?
07:19So they need a new source of growth, and the Chinese consumer is that source.
07:23They've been talking about that since 2007.
07:26I've written about it since then myself.
07:29And, you know, the debate is endless.
07:31It's tedious.
07:32And I think they have to be much more aggressive in establishing a target
07:36for what they're trying to achieve in the upcoming 15th five-year plan.
07:40They want a target that they can reach, and you're saying about 50 percent household contribution to GDP.
07:45I'm saying they need to have an explicit target of boosting household consumption share of GDP from currently around 40 to 50 by 2035.
07:56And the Chinese are good at hitting targets.
07:58They can do it.
07:59They just have to figure out a way to do it.
08:01Last question.
08:01Since we're in Shanghai here, there's been a lot of talk, obviously, globally, about maybe there's this trend towards de-dollarization,
08:09but very difficult to do.
08:12Are there any particular steps that you think we should be watching out for from China or that they've already done with cross-border agreements
08:20and swaps and the like to get the renminbi to be more international?
08:23And how do you see Shanghai and Hong Kong playing those roles?
08:28Yeah, this is a debate we've had for a number of years.
08:30But what's different about it is that the dollar is now under significant downward pressure for many of the reasons that we were just alluding to in the United States.
08:40The executive overreach, the open-ended deficit spending, the high levels of U.S. debt, and the shortfall of domestic saving,
08:51which leads you to big current account balances.
08:53So there is some gradual diversification.
08:56The question has always been, if you don't like the dollar, where do you go?
09:01And, you know, the renminbi is still small in terms of its global presence,
09:05but the Chinese are putting a lot of pieces together that will probably make the renminbi more attractive over a longer period of time as a global reserve currency.
09:15Can they do it, though, with a closed capital account?
09:17No, they have to open the capital account, and, you know, they have to continue to build the capital reform infrastructure in China.
09:27They've made a lot of steps, especially in the equity market,
09:31but, you know, they've got a lot of work to do in terms of international currency markets.
09:36Stephen Roach, always great.
09:37Thanks for kicking off our coverage here at the Bun Summit in Shanghai.
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